CARS: A Performance Evaluation Tool

August 2012 Update— In January of 2012 the CARS™ system was spun-off the Opportunity Finance Network and re-launched as an independent organization.  CARS™ continues to focus on providing intelligence on the CDFI industry to investors of all sizes. The organization, has released new products in tandem with its independent re-launch and Paige Chapel has continued on as director. The new CARS™ programs include: customized analytic services, specialized financial trend analysis, training and webinars and subscriptions to CARS™ CDFI ratings database. These services enhance the ability of CARS™ to draw capital into CDFIs by facilitating connections between CDFI’s and investors, while increasing CDFI transparency. Mark Pinsky chairs the new organization. Pinsky had spoken of possible collaborations between CARS™ and the Small Business Administration (SBA); since the original posting of this article the SBA has decided to employ the CARS™ system in their lending selection process. Currently, CARS™ rated organizations manage almost 50 percent of on balance sheet assets among CDFI fund-certified loan funds.—Evan Lozier. Evan is Capital Institute’s Summer 2012 intern.

August 2010—The CDFI Assessment and Rating System (CARS™) was launched in 2004, after a number of years of research and development, to enable the CDFI loan fund sector to scale up investment and thus to deepen and broaden its impacts. A project of the Opportunity Finance Network, CARS™ has already created a greater degree of standardization and transparency in the CDFI loan fund industry. Sixty of the 600 certified CDFI loan funds have been rated by CARS™ and approximately a third of the investor groups that subscribe to CARS™ now require the funds they target for investment to maintain a CARS™ rating.


Paige Chapel, director of CARS™, reports that the assessment rating system offers CDFI funds a bird’s eye view of how investors assess the risk inherent in their business models.

CARS issues separate ratings for financial strength and “impact” performance. Financial performance is evaluated using a CAMELS methodology. “The CARS™ methodology is much like what regulators use when they evaluate a bank,” says Paige Chapel, director of CARS™. “It is built on understanding an institution’s business model, identifying potential risks, and understanding how investors are or are not insulated from that risk.” Evaluating impact performance is more challenging. Because CDFI loan funds are “boutiques” with no two missions alike, it is often not relevant to use benchmarking as a basis for the impact performance rating system, Chapel reports. Instead CARS™ analysts look at a fund’s stated mission and evaluate how well it is being achieved based on quantifiable metrics.

“We look at each of a fund’s programs, products, and strategies and the data the fund collects as the outputs and outcomes of those programs,” says Chapel. “ We ask them what the data tells them about how well they are achieving their mission and whether that data is relevant. We don’t ask them for pre-defined data points we say, ‘What do you collect? We need it for the last 5 years. How do you collect it and use it?’ Funds that get the highest impact ratings tend to be data driven. They want to see that their programs are achieving their stated mission and that they are effectively deploying their resources.”

Although CARS™ collects a nominal fee from CDFI funds they rate–as Chapel says, we want them to have a “bit of skin in the game”–CARS™ generates the bulk of its revenues from subscribers to the service, thus avoiding the kinds of conflicts of interest that mainstream rating agencies experience when entities they rate pay their bills. CARS™’ current subscribers include 39 national and regional banks, individuals, and foundations. Merrill Lynch was among the first CARS™ subscribers and utilized the rating system to place $93 million in community development investments under the New Markets Tax Credit Program.

“The carrot we would like to dangle before CDFI loan funds is if you get rated it will give you greater access to capital,” says Chapel. “But building that level of credibility as a ratings service for investors will take time.” Meanwhile, although to be rated by CARS™ is a time-consuming exercise and may be one of the most rigorous and demanding examinations that a fund undergoes, Chapel reports that funds are “lined up” to get rated and are more often than not are eager to be rerated.

That’s because CARS offers the funds they rate a rare window into how investors evaluate their performance. “Normally funds don’t get to see the due diligence their investors conduct on them,” says Chapel. “Since CARS™ reports are written from the investor’s perspective, a rated CDFI gets a bird’s eye view of how investors assess the risk inherent in their business model. They may not always like what we say but often when we go back to rerate them we see that they have addressed the weaknesses we previously identified, which over the long term, will strengthen the industry. We see the biggest impact of CARS™ in promoting standardized practices and helping CDFIs strengthen areas where they are vulnerable to higher risk. We believe CARS™ will strengthen industry performance over time.”